Comune Milano, Moody's taglia rating a Aa3, outlook stabile

Dec 22 - Moody's Investors Service has today downgraded the City of Milan's issuer and debt ratings to Aa3 from Aa2. The rating outlook remains stable.

"The rating action is prompted by the fiscal pressures associated with tight operating performance and a high debt burden in the context of reduced fiscal flexibility," says Mauro Crisafulli, a Senior Vice President in Moody's International Public Finance Group.

Moody's recognises that Milan's budget has been suffering due to a reduction in state transfers and a rigid expenditure profile, leading to a progressive deterioration of gross operating balances, in recent years, although the administration has been able to partially compensate for the reduction in state transfers through growth in non-tax revenue and tax recoveries. Moody's notes that an active outsourcing and streamlining strategy has helped contain the growth in operating expenditure over the past few years, however, operating expenditure recently increased due to Milan's focus on public services and higher interest costs generated by the growing indebtedness and its relative exposure to interest rate fluctuations.

"Going forward, the city's ability to achieve adequate operating surpluses will be challenged by state-induced revenue dynamics and an inflexible expenditure profile," explains Mr. Crisafulli. "In addition, Milan's revenue raising flexibility has recently decreased significantly due to the elimination of the ICI property tax on primary residential properties and the freeze by the central government on local governments' tax-raising capacity."

Moody's recognises that Milan's debt has grown in recent years, to an estimated EUR3.8 billion at year-end 2008 -- equivalent to very high 210% ofoperating revenues -- from EUR3 billion or 160% of operating revenues in 2003.

However, despite the rapid increase in debt service costs, Moody's believes that Milan's debt-service capacity is supported by its sound liquidity position.

Moody's expects a large metropolitan area like Milan to maintain a high level of investments, including for strategic infrastructure for Expo 2015. "In this context, the stable outlook reflects Moody's expectations that the city will be able to increase its self-financing ability and thus slow down its debt dynamics," reveals Mr. Crisafulli.

Moody's ratings continue to reflect Milan's status as an important city with high wealth levels, as well as its overall buoyant financial position, including robust liquidity and valuable real and financial assets. The ratings also takes into account the tight and narrowing operating performance, high debt burden and high level of capital investments planned.

With around 1.3 million inhabitants, Milan is the second largest city in Italy, behind Rome. Local GDP per capita is 53% above the national average and the unemployment rate is 3.8% (Italy 6.1%).

The last rating action with respect to Milan was taken on 15 December 2006, when its ratings and outlook were affirmed.